The pound was volatile against the dollar and euro on Thursday, after a new poll gave Theresa May a mere three-point lead over Labour with just a week to go until the general election.
Sterling slipped by around 0.5 per cent against both the euro and the dollar before rebounding, although it still remained unstable.
The YouGov poll, commissioned by The Times, found that the Conservative lead had slipped dramatically in recent weeks and is now within the margin of error.
It shows the Conservatives on 42 points, and Labour close behind on 39.
FXTM research analyst Lukman Otunuga said that investors are avoiding the currency amid fears of Ms May “losing her grip on parliament” after the election.
“Recent polls indicate a potential scenario where Theresa May could be short of the seats required to form a Government, which has sparked concerns of political instability prior to the Brexit negotiations.”
The pound has whipsawed in recent days, buffeted by different polls and interpretations of what the possible election outcomes might mean for the currency in the long run.
UBS Wealth Management wrote in a note on Thursday that a decisive Conservative majority could result in a stronger pound, but JP Morgan analysts have made the argument that markets may react positively to a defeat for Ms May.
They say that the prospect of a softer Brexit from Europe under a Labour-led administration could bolster the value of the pound.
Sterling already fell around 2 per cent last week, after polls showed the Conservatives’ lead over Labour had shrunk from as much as 20 points in April.
The currency remains about 13 per cent lower against the dollar since last June’s Brexit referendum, but it’s up for the year and rallied sharply after Ms May called for a general election.
Strategists at the time said that investors were buying the pound on hopes that a vote would strengthen Ms May’s hand in Brexit negotiations.
Elsewhere in financial markets, the FTSE 100 ended the day about 0.3 per cent higher.
The benchmark stock index is largely made up of major international corporations that generate revenue abroad, meaning that it tends to perform well when the pound is weak.
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